What you need to know about ICO’s

An ICO, or initial coin offering, is sort of like an initial public offering, but with a crypto twist and without the regulatory hoops to jump through, although this could be changing in a big way (more on that in a bit).In the simplest terms, an ICO is a fundraising means in which a company attracts investors looking for the next big crypto score by releasing its own digital currency in exchange, typically, for bitcoin.

See the calendar below, via Coinschedule.com, of upcoming ICOs:

You’ve probably never heard of most of these, but there have been a few ICOs in recent years you most certainly have read about by now.

Take ethereum, for example. Back in 2014, the ethereum ICO raised $18 million in bitcoin, or the equivalent of 40 cents per ether. After a huge spike, ethereum is now trading above $200 with a market cap of approaching $19 billion.

One ICO startup recently attracted more than $150 million in just three hours, and more than $1.3 billion reportedly has been raised overall so far this year. The number of ICO sales concluding each week has almost doubled from an average of 1.5 sales a week in 2016 to 2.75 sales a week for the first four months of 2017, according to Smith and Crown data.

ICO’s tap into that thirst for the “fast and easy” and attempt to raise money quickly by bypassing the regulated fundraising process typically required by banks or venture capitalists. Obviously, that’s only ok for investors when the new currency actually succeeds.

A report by the SEC states that “tokens offered and sold by a ‘virtual’ organization known as ‘The DAO’ were securities and therefore subject to the federal securities laws.” The DAO raised more than $100 million in a crowdsale last year before a hacker managed to steal tens of millions of dollars worth of digital currency, leading to the DAO’s collapse.

The SEC is looking to prevent that from happening again.

“The innovative technology behind these virtual transactions does not exempt securities offerings and trading platforms from the regulatory framework designed to protect investors and the integrity of the markets,” said Stephanie Avakian, co-director of the SEC’s enforcement division.

So what are the red flags you should consider when looking to invest in an ICO?

“Guaranteed” high investment returns. There is no such thing as guaranteed high investment returns. Be wary of anyone who promises that you will receive a high rate of return on your investment, with little or no risk.

Unsolicited offers. An unsolicited sales pitch may be part of a fraudulent investment scheme. Exercise extreme caution if you receive an unsolicited communication—meaning you didn’t ask for it and don’t know the sender—about an investment opportunity.

Sounds too good to be true. If the investment sounds too good to be true, it probably is. Remember that investments providing higher returns typically involve more risk.

Pressure to buy RIGHT NOW. Fraudsters may try to create a false sense of urgency to get in on the investment. Take your time researching an investment opportunity before handing over your money.

No net worth or income requirements. The federal securities laws require securities offerings to be registered with the SEC unless an exemption from registration applies. Many registration exemptions require that investors are accredited investors; some others have investment limits. Be highly suspicious of private (i.e., unregistered) investment opportunities that do not ask about your net worth or income or whether investment limits apply.

The entire ICO model is still very much experimental. So even though there is large opportunity for huge gains, the chances of loss are more likely.

Now that the SEC has become involved and harsher regulations are imminent, many investors feel that this is the beginning of the end for the ICO model.

More rational figures however, feel that this is just the beginning and that sensible regulation is what’s needed to ensure this crowdfunding model protects investors in the future as much as it exposes them today.